Edited version of private advice

Authorisation Number: 1052041293916

Date of advice: 20 October 2022

Ruling

Subject: Deed of settlement

Question 1

Did CGT event C2 occur when you entered into the Deed of Settlement?

Answer

Yes.

Based on the information provided to the Commissioner event C2 occurred when you entered into the settlement agreement.

A CGT event C2 occurs if:

your ownership of an intangible CGT asset ends by the asset:

1) being redeemed or cancelled; or

2) being released, discharged or satisfied; or

3) expiring; or

4) being abandoned, surrendered or forfeited; or

5) if the asset is an option - being exercised; or

6) if the asset is a convertible interest - being converted.

Your right to seek compensation due to the breach of the Agreement is an intangible CGT asset.

Consequently, entering into the Deed of Settlement is a cancellation of those rights that arose due to the actions and inactions of the defendant.

Question 2

Are the payments capital proceeds associated with the CGT event C2?

Answer

Yes.

The general rules regarding capital proceeds provides that the total capital proceeds from a CGT event are the total of:

1) the money you have received, or are entitled to receive, in respect of the event happening; and

2) the market value of any other property you have received, or are entitled to receive, in respect of the event happening (worked out as at the time of the event).

The payment is a result of you entering into the deed of settlement and the payment is therefore capital proceeds.

Question 3

Are the payments assessable to you on the date when the C2 event occurred?

Answer

Yes.

The payments will be assessable to you on the date the C2 event occurred.

This is when the contract was entered into and resulted in the asset ending. Subsection 116-20 (1) of the ITAA 1997 provides that the capital proceeds includes amounts of money you receive, or are entitled to receive, in respect of the CGT event.

If you do not receive payments you are entitled to receive in later income years, section 116-45 of the ITAA 1997 (Non-receipt rule: modification 3) will apply.

Question 4

Are you entitled to the 50% discount for the capital gain which arises from the C2 event?

Answer

Yes.

Section 115-15 provides:

To be a discount capital gain, the capital gain must result from a CGT event happening after 11.45 am (by legal time in the Australian Capital Territory) on 21 September 1999.

Section 115-20 provides:

(1) To be a discount capital gain, the capital gain must have been worked out:

•         using a cost base that has been calculated without reference to indexation at any time; or

•         for a capital gain that arose under CGT event K7-using the cost of the depreciating asset concerned.

Subsection 115-25(1) provides:

(1) To be a discount capital gain, the capital gain must result from a CGT event happening to a CGT asset that was acquired by the entity making the capital gain at least 12 months before the CGT event.

Taxation Ruling TR 95/35 Income tax: capital gains: treatment of compensation receipts states that the right to seek compensation is acquired at the time of the compensable wrong or injury. In your case all compensable wrongs occurred more than 12 months before the CGT event.

The 50% discount will apply in your circumstances.

This ruling applies for the following period:

Year ended 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

You were a partner in an accounting firm in Australia.

Around 20XX, you and a company (the Company) commenced work together.

In 20XX, you resigned as a partner of the accounting firm and formally exited the firm a few months later.

After resigning as partner, you executed and entered into an agreement (the Agreement) with the Company which contained the terms upon which you would join the Company.

You were to head up the Company.

In 20XX, the Company removed you from the head position of the Company and informed you that your employment with the company would be terminated as of a certain date.

The notice period of the purported termination of your employment by the company was less than the two months' notice required under the Agreement.

Based on the above, you alleged that the Company had breached the Agreement.

You informed the Company that the Agreement was terminated as you had accepted the Company's repudiation of the Agreement constituted by the Company's breach of the Agreement.

In 20XX, you issued an amended statement of claim to the Company claiming a breach of contract and claimed damages, interest and cost associated with the alleged breach of contract. Notably, under the Agreement various quantities of shares were to be granted to you by the Company on certain dates.

None of these claims were for liquidated damages.

Later in 20XX, you and the company entered a Deed of Settlement to settle all outstanding claims of yours against the company including but not limited to those claims that arose due to the breach of the Agreement. You entered into the Deed of Settlement more than 12 months after the last tranche of shares was due to be granted to you under the Agreement.

At all relevant times you were an Australian resident for tax purposes.

You have never carried on a business which obtained and disposed of legal or equitable rights.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 104-25

Income Tax Assessment Act 1997 Section 115-15

Income Tax Assessment Act 1997 Section 115-20

Income Tax Assessment Act 1997 Section 115-25

Income Tax Assessment Act 1997 Section 116-20

Income Tax Assessment Act 1997 Section 116-45

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